Understanding Fund Performance

Understanding Fund Performance

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Performance tables of unit trusts should always come with a caveat: few are comparable as each set of awards has different criteria, some of which are so specialised as to be almost meaningless. Candice Paine, head of retail at Sanlam Investment Management, challenges one myth in retail investing, that if you invest with an award-winning fund manager you are assured of top performance.

Paine claims there are many different awards with widely differing criteria. “Some of them will be a mystery to the average retail investor,” she says. More importantly, it sometimes happens that the same fund management company may simultaneously manage both a top performing fund and a worst performing one. Especially with specialist funds, they each have particular cycles.

“An individual fund award doesn’t necessarily mean other funds managed by the same fund management house will be top, or that the same fund will continue to be top quarter after quarter. You need to research for yourself what the award was for – taking particular notice of the performance period and how risk is calibrated. You may be surprised at some of the criteria applied to fund performance,” says Paine. Paine also recommends that investors not be blindly brand loyal when it comes to choosing unit trust investments as this may not always be an accurate reflection of consistent performance.

Who’s done what?

Last year saw a return to the bull market, though few analysts were willing to call it such. According to Plexus, for the 12 months to December 2009, the RMB Resources Fund topped the charts with a return of 53,6%, followed by the PSG Alphen Growth Fund, up 43,5%. Worst performance came from the Investment Solutions US Dollar Cash Feeder Fund, with a negative 21,3%, as local investors were squeezed by the rand’s strength.

Over three years the Cadiz Equity Ladder is the best performer, up 22,2% a year, and over five years it’s resources again, this time the Old Mutual Mining and Resources Fund with an annualised return of 29,2%. In the most recent results for the 12 months to April 2010, Prieur du Plessis, Plexus group chairman, says the best-performing sectors were the Domestic Equity – Financial and Domestic Equity Value sectors with 55,7% and 52,3% respectively. As was the case over the quarter, the worst-performing sectors over the 12-month period were the Foreign Fixed Interest – Varied Specialist and the Foreign Fixed Interest – Bond categories with returns of –18,5% and –10,7% respectively.

The three-year and five-year charts are topped by the Domestic Fixed Interest – Money Market and Domestic Equity – Resources & Basic Industries sectors with 9,9% and 22,9% per annum. The best-performing fund over the last quarter was the Grindrod Global Property Income Fund with a return of 11,9%, followed by the Coronation Financial Fund with 11,7%. The worst fund over this period was the Prescient Global Income Feeder Fund A1 with -7,4%.

The best kept secret in successful investing

The best-performing fund over the last 12 months was the RMB Small/Mid-Cap Fund A with a return of 63,8%. Over the last three years it was the Cadiz Equity Ladder Fund with an annual 19,4%, and over the last five years the Old Mutual Mining & Resources Fund A with an annual 26,5%.  Most investors focus on whether or not their portfolio has appreciated. But capital appreciation is only the second most important rule of investing. Capital preservation is the first.

When looking at a fund’s track record it’s important to examine its performance both when the stock market produced positive returns (bull markets) and when it produced negative returns (bear markets).  This is because preserving capital in bear markets is an essential contributor to long-term performance. Delphine Govender, portfolio manager at Allan Gray, says: “Recovering from a loss is much harder than investors realise.  Not only does it take time, it takes an exponentially greater return.”

For example, a 10% loss requires an 11,11% gain to break even; a 50% loss requires a 100% gain to break even and a loss of 70% requires a 300% gain to break even. One consistently top fund manager is Allan Gray. Its Equity fund was launched in October 1998 and since then, up until the end of March this year, the market has gone through 84 ‘up’ months and 54 ‘down’ months. During the 54 down months, the ALSI produced an average monthly return of -3,9%, whereas the Fund’s average monthly return was -1,7%. How was this achieved? Govender says that contrarian value-based investors like Allan Gray always invest with a margin of safety. They first estimate the company’s intrinsic value and then look to invest in those companies whose intrinsic value is greater than the current price attributed by the market. This difference between value and price is the margin of safety.

Raging Bull awards – top fund managers for the year, as rated by PlexCrown:

Domestic management company of the year

The South African-domiciled management company with the best overall performance across sectors consisting of a suite of five or more rand-denominated funds with at least three years’ history:

  1. Allan Gray
  2. Prudential
  3. Nedgroup Investments

Offshore management company of the year
Stanlib Multi-Manager was recognised as the overseas-domiciled management company with the best overall performance across sectors consisting of a suite of five or more non-rand-denominated funds with at least three years’ history.

  • Best Broad-Based Domestic Equity Fund: Absa Select Equity Fund
  • Best Domestic Fixed Interest Fund: Stanlib Cash Plus Fund
  • Best Foreign (South African-Domiciled) Equity Fund: Allan Gray-Orbis Global Equity Feeder Fund
  • Best Offshore Global Equity Fund: RE•CM Global Fund
  • Best Domestic Asset Allocation Flexible Fund:Rezco Value Trend Fund
  • Best Domestic Asset Allocation Prudential Fund: Allan Gray Balanced Fund
  • Best Domestic General Equity Fund: Absa Select Equity Fund
  • Best Offshore Global Asset Allocation Fund: Ashburton Replica Euro Asset Allocation Management Fund

Top outright performers over three years

  • Best Domestic Equity General Fund: Absa Select Equity Fund
  • Best Domestic Equity Growth Fund: RMB Strategic Opportunities Fund (A)
  • Best Domestic Equity Industrial Fund: Stanlib Industrial Fund (A)
  • Best Domestic Equity Financial Fund: Stanlib Financials Fund
  • Best Domestic Equity Resources & Basic Industries Fund: Old Mutual Mining And Resources Fund (R)
  • Best Domestic Equity Smaller Companies Fund:RMB Small Mid-Cap Fund
  • Best Domestic Equity Value Fund: Nedgroup Investment Value Fund (A)
  • Best Domestic Asset Allocation Flexible Fund: Bluealpha All Seasons Fund
  • Best Domestic Asset Allocation Prudential Fund: Dotport Stable Prudential Fund of Funds
  • Best Domestic Fixed Interest Bond Fund: Oasis Bond Fund
  • Best Domestic Fixed Interest Income Fund: Stanlib Cash Plus Fund
  • Best Domestic Real Estate Fund: Stanlib Property Income Fund
Eamonn Ryan
Before becoming a financial writer and freelance journalist in 1997, Eamonn Ryan was a legal adviser, company secretary and alternate director at listed company Cashbuild Limited from 1988 to 1997. Since becoming a financial writer, he has focused on the business and financial sectors, as well as personal finance, writing for Finweek, The Star Business Report, Sunday Times Business Times, Business Day, Mail & Guardian, Entrepreneur, Corporate Research Foundation (which brings out a series of books each year ranking SA’s best employers and best managers), as well as a host of once-off and annual publications such as ‘Enterprising Women’ and ‘Portfolio of Black Business’. He also writes media releases, inhouse magazines and sustainability or annual financial reports for various South African corporates and financial services groups, including the Ernst & Young annual M&A book.